Reference no: EM132498208

On August 1, Year 3, Carleton Ltd. ordered machinery from a supplier in Hong Kong for HK$500,000. The machinery was delivered on October 1, Year 3, with terms requiring payment in full by December 31, Year 3. On August 2, Year 3, Carleton entered a forward contract to purchase HK$500,000 on December 31, Year 3, at a rate of $0.165. On December 31, Year 3, Carleton settled the forward contract and paid the supplier.

Exchange rates were as follows:

                                                                         Spot rates                                   Forward rates

August 1 and 2, Year 3                         HK$1 5 C$0.160                           HK$1 5 C$0.165

October 1, Year 3                               HK$1 5 C$0.164                               HK$1 5 C$0.168

December 31, Year 3                           HK$1 5 C$0.169                                    HK$1 5 C$0.169

Required:

Question 1: Assume that the forward contract was designated as a cash flow hedge of both the purchase of the machinery and the payment of the accounts payable. Of the balance in accumulated other comprehensive income on October 1, 50% was transferred to the machinery account when the machinery was delivered and the other 50% was reclassified into net income when the supplier was paid. Calculate the following amounts for the financial statements for the year ended December 31, Year 3:

(i) Machinery

(ii)Exchange gains/losses

(iii)Cash flows for the period

Question 2: Assume that Carleton is a private company and uses ASPE for reporting purposes. Calculate the following amounts for the financial statements for the year ended December 31, Year 3:

(i) Machinery

(ii)Exchangegains/losses

(iii)Cash flows for the period

Question 3: Explain the similarities and differences between the account balances under the three scenarios above. Which scenario would present the higher return on equity for Carleton for Year 3?